創力 (LTRX) 2022 Q3 法說會逐字稿

Good afternoon, and welcome to the Lantronix Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Rob Adams, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. And thanks for joining the third quarter fiscal 2022 conference call. Joining us on the call today, is Paul Pickle, our President and Chief Executive Officer; and Jeremy Whitaker, our Chief Financial Officer. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call in details for the phone replay in today's earnings release.

During this call, management may, may forward looking statements which involve risks and uncertainties that could cause our results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished to the SCC today and is available on our website and in the company's SCC filings such as the 10-K and 10-Q. Lantronix takes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Please refer to the news release and the financial information in the investor relations section of our website for additional details that will supplement management's commentary. Furthermore, during the call, the company will discuss some non-GAAP financial measures. Today's earnings release, which is posted in the investor relations section of our website describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use.

With that, I'll turn the call over to Jeremy Whitaker, our Chief Financial Officer. Jeremy?

Thank you, Rob, and welcome to everyone joining us for this afternoon's call. I'm going to provide the financial results as well as some of the business highlights for our third quarter of fiscal 2022 before I hand over to Paul for his commentary. For the third quarter of fiscal 2022, we reported revenue of $32.3 million an increase of 89% when compared to $17.1 million for the third quarter of fiscal 2021. And down 4% sequentially as compared to $33.7 million reported in the second quarter of fiscal 2022.

The year-on-year increase was driven and by organic growth of 32%, in addition to contribution from our recent acquisition of the TN companies GAAP gross margin was 42.1% for the third quarter of fiscal 2022, as compared with 42.9% in the prior quarter. The sequential decline in gross margin was primarily due to increased supply chain costs, in addition to product mix. While logistics and supply chain costs were higher than our initial expectations due to significant disruptions in the Asia Pacific region experience during the quarter, we navigated these issues delivered revenue above our initial expectations and largely met customer needs.

Selling general and administrative expenses for the third quarter of fiscal 2022 were $8.3 million compared with $5 million for the third quarter of fiscal 2021, and $8.9 million for the second quarter of fiscal 2022. Research and development expenses for the third quarter of fiscal 2022 were $4.5 million compared with $2.5 million, the third quarter of fiscal 2021 and $4.3 million for the second quarter of fiscal 2022. The year on year increases in SG&A and R&D were largely driven by the acquisition of the TN companies at the beginning of this fiscal year.

GAAP net loss was $3.2 million or $0.09 per share during the third quarter of fiscal 2022, compared to a GAAP net loss of $1.2 million, or $0.04 per share during the third quarter of fiscal 2021. The increase in GAAP net loss was primarily due to earn out consideration and non-cash charges related to our most recent acquisition.

Non-GAAP net income was $2.8 million or $0.08 per share during the third quarter of fiscal 2022, compared to non-GAAP net income of $1.5 million or $0.05 per share during the third quarter of fiscal 2021. After adjusting for our recent capital raise, which impacted non-GAAP EPS by approximately $0.02 per share, this quarter, we are meeting our post acquisition quarterly target of $0.10 per share.

Now turning to the balance sheet. We ended the March, 2022 quarter with cash and cash equivalence of $22.8 million, a decrease of $13.6 million from the prior quarter. Working capital decreased to $51.8 million as of March 31, 2022, as compared with $62 million in the prior quarter. The decrease in cash and working capital was primarily due to the use of cash to pay down a high interest loan. In January 2022, net inventories were $33.2 million as of March 31, 2022, compared with $29.4 million as of December 31, 2021.

Now turning to our annual outlook, which includes approximately 11 months of contribution from our most recent acquisition. Once again, we exited the quarter with record backlog and strong customer demand. Based upon our current outlook, we expect to see a much stronger fourth quarter.

And as a result, we are narrowing the range and increasing our annual revenue guidance for the full fiscal year 2022. We are now targeting annual revenue of $125 to $129 million representing growth in the range of 75% to 80%. In addition, we are adjusting our annual earnings target, which includes the full share impact of our recent capital raises and expect non-GAAP EPS in a range of $0.31 to $0.37 per share representing growth of 64% to 95%. We continue to believe that without supply chain constraints, we could deliver annual revenue and non-GAAP EPS above the high end of our updated guidance.

I'll now turn the call over to Paul.

Thank you, Jeremy. I am pleased to report another solid quarter to our shareholders here today. While our view of component commitment early in the March quarter, coupled with expectations for typical governance, customer seasonality pointed to a softer Q3.

Thanks to the hard work of our operations team here at Lantronix, we managed to deliver over $32 million in revenue down only 4% sequentially. And we booked well above that rate. Barring supply change constraints demand in the March quarter, would've been sequential growth. To that point shipments late to customer expectations in Q3 totaled just over $7 million up from $5.7 million as compared to the second quarter. Q3 was uniquely challenging in this regard with the large regional disruptions in the Asia Pacific region, and even where direct factory dependencies do not exist. We still experienced challenges in both secured components in import export logistics routes. These disruptions created both significant operational challenges and costs, but I am pleased to say that we were able to largely mitigate the disruption and deliver. We view these costs as transitory in a more normalized environment. I'm especially pleased to report March results because they were driven by strong organic growth on the order of 32% year over year, this is happening for a number of reasons.

First of all, we are now 3 years into the transformation of Lantronix and many of the basic blocking and tackling functions we set forth to improve upon 3 years ago are beginning to show results. We're going to market better, we are more in tune with our customer and our customer’s needs, and we are doing a better job in closing those sales. Secondly, in transforming Lantronix through acquisition, we have acquired pieces of the puzzle necessary to deliver our customers, the technologies they need in order to better capitalize on the promise of IOT and accelerate our growth as we look toward our future.

And finally, we are fortunate in that the age of IOT is being realized whether spurred or accelerated by COVID and the resulting remote work environment many of us have come to know and enjoy, or necessitated by supply chain disruptions, which have forced companies to rest every bit of efficiency possible out of their operations, or perhaps even the rollout of 5G networks.

Our design activity is such that we see continued growth opportunity on the horizon for Lantronix. With that, let's look at our quarter with a little more granularity. Well, we expected the March quarter to be down sequentially, some product lines did grow in Q3, including our industrial switching products, which grew almost 10% sequentially in what is normally a more seasonal quarter.

We also saw good growth in the quarter from network interface products and optical communication interfaces. Compute modules after posting strong results in Q2 were down as expected in March due to component availability, but importantly, professional services were up almost 30% from the prior quarter and development kit sales almost doubled from the prior quarter. These 2 items are leading indicators for intelligent edge compute business and point to strong future revenue growth.

Conversely, our remote environment solutions were down sequentially after several strong, sequential quarters growth. And as has been the case, historically, some quarter-to-quarter volatility in this product line is expected. All in, we expect a return to growth and anticipate delivering a strong double-digit growth here.

Looking at our intelligent edge compute module business. We expect a return to growth in our fourth quarter. And we look for edge compete to be an important growth driver of Lantronix as we look to FY ‘23 and beyond. We continue to gain traction in this technology area, adding to the design ends we've spoken to in the past and looking to fiscal 2023, we continue to expect we will begin shipping the INEL quantum edge device. As we have stated in the past this large design win, which we have conservatively estimated contribution at $10 to $20 million in revenue for fiscal 23 alone, takes us a long way towards achieving our 20% plus annual organic growth target.

In addition, we have received an award for an additional 20,000 units for this platform more than doubling the previous award. We continue to believe an additional upside potential for intelligent edge applications at Lantronix in the years to come. While the near term has its challenges in the form of supply chain disruptions and related component pricing variations, we continue to view these as transitory. We will navigate these issues as we deliver on the promise of IOT for the, the, of the shareholders.

I'll now turn it over to the operator for Q&A.

(Operator Instructions) The first question comes from Mike Walkley of Canaccord Genuity.

Congratulations on the strong quarter and. Starting with INEL with the 20,000 additional units ordered, how does that impact that $10 to $20 million outlook? Does that put the high end in the [range] or are those 20,000 units more, follow on into future years?

Yes, that's a great question. I would say at this point, we would say it's probably at the higher end of that range. The details are really kind of associated with customers rollout. There's one additional vendor dependency that we have. One of INEL's vendors has to deliver some boards, they're experiencing some difficulty. And so this production is expected to go forward in stages. So at this point, we understand what it is the customer would like, their schedule is a lot more aggressive than what we believe that they can execute on. And so we're still being a little bit cautious in terms of the rollout, how we see that revenue rolling out over the next fiscal 23, but it could be toward the high end of that range.

Great. That's great to hear. And a follow up question. Can you update us on your strong relationship with Qualcomm? You made some comments about good demand for intelligent edge going forward. Can you just update us on that pipeline and your ability to procure supply to support your opportunity funnel?

Sure. So the relationship is going really well with Qualcomm. We had several meetings with different geographies within Qualcomm to talk about expanding the relationship and chasing more opportunity. And I think they've seen in us a unique ability to make customer applications come alive with the software that we develop that runs on their platform in addition to the hardware that we put together for our customers. So it's going really well. I think this is the area that we really want to continue to build a core expertise, computing platforms and the architectures that Qualcomm is pushing will define what edge hardware looks like in the future. And we definitely want to be a part of that process on a go forward basis. So it's going really well at this point.

Great. Last question for me, then I'll jump back in the queue. You mentioned $7 million that you weren't able to ship up, but sounds like you did a good job working through tough supply chain issues that are well known out there. Can you just give us a little more color of what are the areas that are still stretched or problematic from a lead time standpoint and how you see it may be improving over the year, or June quarter, and the second half of the calendar year?

Yes. So this quarter we had some significant upside to component availability in the December quarter. March, we didn't have the commitments at the time of the earnings call, but we were able to get some additional supply from Qualcomm. They were very supportive on that front, which did get us some additional revenue. Having said that some of the additional upside we should have been able to ship, we weren't able to ship because, well, we don't necessarily have a manufacturer that was necessarily isolated in Shenzhen. It is a major import export hub.

We actually saw, specifically to your question where we see difficulty, I think we see a little bit of easing on the digital side. Processors, Qualcomm's always been supportive, but this quarter we didn't have as many as we would like. Memories coming in line, both flash, DVR, mixed signals, still a bit tough. Some of the ethernet switches, still a bit tough, but as it kind of relates to light at the end of the tunnel, we're starting to even see some RTCs that are in very short supply. We're starting to get committed scheduling from manufacturers in the January timeframe. So it does feel like we're turning that corner. However, Q3 was a bit unique in terms of its challenges.

Okay. Well, congrats again, on the strong results. And I'll jump back in the queue.

Thank you.

The next question comes from Christian Schwab of Craig-Hallum Capital Group.

Great execution in this environment. A couple quick questions. I'm sorry, I jumped on a little bit late, did we say, we now have a 20,000-unit order in hand from INEL? Did I hear that correctly?

It's an additional award. So the previous award was 15,000 units, 1000 prototypes, 15,000 preliminaries, or I should say, preliminary production runs,1,000 units of pilot build. And so that 15,000 has now been taken to 35,000. So we got an additional 20,000-unit award for production in the quarters to come.

Okay. And is that roughly at kind of the same dollar content that you guys have talked about before? I think roughly at about $1,500 plus or minus.

Yes, I think that's what we're anticipating. The pilot run is a bit higher at $1,900 content, but we would, we would expect as we entered more volume production to be able to kind of reduce some of that. We're spot buying for some of the early builds and we're trying to stage as many orders as we can for the production run. And we would anticipate to start that preliminary production run, to start to recognize revenue in the December quarter and then ramp up to target volumes after that.

Great. And I know we're all hoping for lead times on components and logistics to eventually normalize, but did you guys dis did you guys disclose exactly what your backlog was at the end of the quarter?

We did not. I can say that we did have record starting backlog for Q 4. We had a record in terms of quarter ending total back log. We stated we had a significant booking number that was considerably higher than our current quarter's revenue. So if you wanted total backlog, at this point in time, it's on the order of where we were last quarter, but the late to CRD number did pick up a little bit. We should have had, last quarter, we had a late to customer request, date of $5.7 million. It went just above $7 million this time around. So we should have had about another $1.4 million, $1.3 million of revenue in the quarter that we weren't able to get out the door so that late to CRD did move up a little bit.

Great. And then my last question as it relates to future growth. You talked about before, being very confident in 20% CAGR outlook, which you'd hope would be conservative kind of, depending upon the rollout of some of these big awards. Now given potentially a bit more clarity on those awards, I understand supply chain logistics, think everybody listening does. But that being said, is that still the baseline number that you feel very confident in or could that be starting to prove a little bit too conservative?

That's a tough question, Christian. If I do the roll up today, I'm too conservative, but if I factor in a little bit of moderation in terms of some of the older products, and I think that's prudent, I think I'm probably on the conservative side, but we are talking about a 15-month outlook at this point. And so we'll give updated fiscal year guidance at the next quarter, but we do, uh, feel pretty good about that 20% number at this point in time. And as my old boss used to say, you have to shoot above the hoop in order to get the ball in the basket. And so we're definitely shooting above that, but we're still putting together an outlook that we think is prudent.

Great. Congratulations again on a solid quarter.

Thank you.

(Operator Instructions) The next question comes from Chad Tevebaugh of Needham.

It's Chad on for Ryan Koontz. Just on margins in the quarter, I think last quarter, they're down sequentially, primarily due to a strong intelligent edge quarter. It sounds like supply chain may have been a bigger impact this quarter. Is there any way to sort of quantify that impact?

I think if we look at our -- we gave a PPV number for last fiscal year. So on the order 2 point, I think the number I gave previously was about $2.1 million and $71 million in revenue. The reality is it was probably more on the order of $2.4 million. I think, if you think in terms of, we're shipping a lot more revenue, but in terms of percentage of revenue it's up ticked slightly, it would be easily the impact this quarter that we had was I guess just above 200 basis points. If you look at the total cost, it's substantially higher, and I think on a positive, we're managing the OPEX in order to compensate for that. And we've been doing slightly better than we had originally projected on the integration of 2 companies.

If you go back to our August 2 close, and the performs that we said we'd get out of the 2 PNLs, we're still delivering that good of a number, ahead of expectation. And we still have around the July timeframe to do a couple of additional integration maneuvers, the last pieces of it to get some additional cost out. So I think we're running a bit ahead of leveraging the PNL where we expected to be so that's a positive. We're managing the OPEX to compensate for some of the pricing pressure that we're experiencing from having to go out to the spot market. If you said it was a couple hundred basis points, you wouldn't be that far off.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Pickle for closing remarks.

Thank you, Danielle. Thank you for joining us today and have a great week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.